Once the hottest import into the United States, Aussie wines are struggling with bad times

How could Australia's wine fortunes boomerang so suddenly? Just a few years ago, Australia was considered one of the great success stories of the wine world. Beginning in the 1990s, the Land Down Under experienced a decade of double-digit growth as its quality varietal wines became a mainstay of American shoppers looking for values. At the high-end, wine lovers discovered that exceptional South Australian Shiraz could be red wines of unusual richness and power.

Times have changed, though, and much of the Australian wine business is now struggling. Exports of bottled wines to the U.S. decreased 9 percent by volume in 2008 and 23 percent by value, while sales of brawny, high-end Shiraz are generally sluggish. For the consumer, industry turmoil has meant fewer Aussie wines on retail shelves. Some U.S. stores are seeing reduced supplies of certain top wines, as well as an inconsistent availability of some brands.

The most visible sign of Australia's pain may be the problems that have hit its two biggest wine companies. In August, Constellation Brands announced that it would sell three of its 10 Australian production facilities, as well as 23 vineyards comprising 4,400 acres in South Australia, Western Australia and Victoria. About 350 employees—more than 20 percent of the company's Australian division—are losing their jobs, and one-third of the Australian product portfolio is slated for elimination.

Things aren't any better at Foster's. In June, chief executive Trevor O'Hoy resigned, accepting responsibility for the disappointing performance of the company's wine division. Foster's has been reviewing its entire wine operation, and industry analysts have suggested that any company asset is potentially in play and that the wine business might be spun off from the more profitable beer operation. Just this week, the company posted its first loss in 16 years after writing down the value of its global wine business by $517 million.

Australia is in the midst of what some industry professionals call its perfect storm. In addition to a weak U.S. economy, producers are battling lousy exchange rates, their worst drought on record, excessive vineyard plantings and the ripple effects from a decade of frantic consolidation. And no one sees any easy solutions. "In order for Australia to move forward, we need to face some extremely unpalatable truths," said Paul Henry, the general manager of the Australian Wine and Brandy Corporation, a government-sponsored trade organization.

Chief among those truths, according to Henry and other industry observers, is that Australia no longer has unchallenged hegemony of the value domain. In addition to strengthened competition from countries like Chile, there's also the increased heft of the Australian dollar. In August 2003, the Australian dollar was at $0.65. In July 2008 it reached a peak of $0.97. "The exchange rates have really eroded the profit margins. People who built their business on those assumptions are finding it's all starting to unravel," said Andrew Pike, owner of Pikes in the Clare Valley.

Another huge factor has been the drought, which has continued more or less for a decade. Water access is especially crucial for volume growers in the country's inland regions, such as Riverland and Riverina, where irrigation allows yields that routinely surpass 15 tons per acre. But drought has also taken a toll in quality wine regions. In McLaren Vale in South Australia, for example, heavyweight Shiraz specialist Mollydooker saw its 2007 yields drop to 42,000 cases, compared to 72,000 in 2006.

Australians recognize that part of their financial trouble has been self-induced. The enormous popularity of Shiraz, especially from Barossa and McLaren Vale, distracted from other wines. So even though sales of some high-end brands remain strong, the Australian wine trade is retooling with a new marketing campaign, called Wine Brand Australia, to communicate the country's stylistic and regional diversity. Though many industry professionals consider the notion late in coming, they agree it's the right move. "The industry as a whole never taught that Australia has 65 regions, not just South Australia. That's a bit like defining Italy as only Brunello," said Chuck Hayward, wine buyer at the Jug Shop in San Francisco, a leading retailer of Australian wine.

But while the country tries to tweak its marketing, many Australian producers have reduced allocations to the U.S. Some of that has been due to the reduced yields of recent vintages, but exchange rates and slow sales are also an issue. Some vintners are refocusing on domestic customers, while others are shifting supplies to emerging markets. Pikes, which makes about 50,000 cases a year, primarily of Riesling, Shiraz and a Sémillon-Sauvignon Blanc blend, has had difficulty in the U.S. market of late, and is consequently shifting distributors; they are also looking to develop new markets, primarily in Canada, Europe and Southeast Asia.

Hayward saw his most recent allocations of the top bottlings from Penfolds—the Shiraz South Australia Grange 2003, the Shiraz Barossa Valley RWT 2005 and the Cabernet Sauvignon South Australia Bin 707 2005—reduced by more than half. "They're going to Japan and China, according to my sources at Foster's [which owns Penfolds]," he said. A source familiar with Foster's said the company is reducing allocations in response to weakened demand.

Of course, no one in the industry thinks Australian wines are going away. Quality at the high end is too good for that, and brands such as Yellow Tail remain exceptionally successful. But some salespeople anticipate a winnowing of Australian wines in the U.S. market, especially at the high end. "A lot of people jumped on the bandwagon five or six years ago because it was so easy to sell $50 Shiraz here," said Ben Hammerschlag, owner of Epicurean Imports in Seattle, Wash. "The market got very crowded, and many of those wines are now getting discounted, and many brands won't survive."

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